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AS-18 “RELATED PARTY DISCLOSURES”

AS-18 “RELATED PARTY DISCLOSURES”. CA RAJEEV SOGANI DATE-17 th DEC,2011. NEED OF AS-18.

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AS-18 “RELATED PARTY DISCLOSURES”

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  1. AS-18 “RELATED PARTY DISCLOSURES” CA RAJEEV SOGANI DATE-17th DEC,2011

  2. CA RAJEEV SOGANI 17th December,2011 NEED OF AS-18 Sometimes business transactions between related parties lose the feature and character of the arms length transactions. Related party relationship affects the volume and decision of business of one enterprise for the benefit of the other enterprise. Hence, the disclosure of related transaction is essential for proper understanding of financial performance and financial position of enterprise.

  3. CA RAJEEV SOGANI 17th December,2011 OBJECTIVE The objective of this accounting standard is to establish the requirements for disclosure of related party relationships and transactions between a reporting enterprise and its related parties.

  4. AS-18 “Related Party Disclosures” is mandatory in nature and applicable to level 1 enterprises. • Level 1 enterprises includes enterprises which fall in any one or more of the following categories, at any time during the accounting period. • Enterprises whose equity or debt securities are listed whether in India or Outside India. • Enterprises, which are in the process of listing their equity or debt securities as evidenced by the BOD’s resolution in this regard. • Banks including co-operative banks • Financial institutions • All commercial, industrial and business reporting enterprises whose turnover for the immediately preceding accounting period exceeds ` 50 crore. • All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of ` 10 crore at any time during the accounting period. • Holding and Subsidiary enterprises of any one of the above at any time during the accounting period. APPLICABILITY CA RAJEEV SOGANI 17th December,2011

  5. The enterprises which do not fall in any of the above categories are not required to apply this AS. • Where an enterprise has been covered in any one or more of the above categories and subsequently, ceases to be so covered, the enterprise will not qualify for exemption, until the enterprise ceases to be covered in any of the above categories for 2 consecutive years. • Where an enterprise has previously qualified for exemption but no longer qualifies in the current accounting period, this AS becomes applicable from the current period. However, the corresponding previous period figures need not be disclosed. CA RAJEEV SOGANI 17th December,2011

  6. CA RAJEEV SOGANI 17th December,2011 KEY TERMINOLOGIES RELATED PARTIES It means where one party has ability to control or exercise significant influence over another party, during anytime of accounting period.

  7. CA RAJEEV SOGANI 17th December,2011 CONTROL Where any one of the following conditions is satisfied- (a) One party holds more than 50% of the voting power of another company or (b) One party has power of composition of BOD/Governing Body of an another company/entity or (c) One party has power to direct financial or/and operating policies of another entity and such party holds substantial interest (represents 20% or more interest in voting power).

  8. SUBSTANTIAL INTEREST A person is considered to have a substantial interest in another enterprise if it owns, directly or indirectly 20% or more interest in voting power of other enterprise. CA RAJEEV SOGANI 17th December,2011

  9. CA RAJEEV SOGANI 17th December,2011 SIGNIFICANT INFLUENCE It can be attained by power to participate in financial and/or operating policy decisions of an entity, but not control of those policies. Such power can be gained by- • Voting power or • Application of law or • Agreement with shareholders.

  10. KEY MANAGEMENT PERSONNEL • Key management personnel are those people who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. • For example, in case of company, Managing Director, Whole Time Director, Manager etc. CA RAJEEV SOGANI 17th December,2011

  11. CA RAJEEV SOGANI 17th December,2011 AS-18 deals only with the following related party relationships- 3(a) Enterprises that directly, or indirectly through one or more subsidiaries, control or are controlled by or are under common control with, reporting enterprise. Direct Control 55 % of shares Power to direct+30% shares Direct Control Indirect Control A Ltd B Ltd C Ltd

  12. CA RAJEEV SOGANI 17th December,2011 3(b) Associates and joint venture of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or joint venture. 25% of voting power 30% of voting power RP under 3(b) RP under 3(b) Cannot be regarded as related parties related parties RP RP A Ltd B Ltd Associate C Ltd Associate B Ltd A Ltd Joint Venture

  13. 3(c) Individuals owning directly or indirectly, an interest in voting power, have control or significant influence over the reporting entity and relatives of such individual. Example- Related parties Control or Significant influence “Relative” means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence or be influenced by that individual in his/her dealings with the reporting enterprise. CA RAJEEV SOGANI 17th December,2011 Ram Ltd. Ram or Relatives of Ram

  14. CA RAJEEV SOGANI 17th December,2011 3(d) Key management personnel and relatives of such personnel.

  15. 3(e) Enterprises over which individual or key management personnel described as earlier is able to exercise significant influence. Example- - - - - - - - - - - - - - - - - - - - 34% of Voting Power Related parties under 3 (c) Related parties under 3(e) Firm X Ltd. Supplies raw material Having a separate partnership firm Husband & wife CA RAJEEV SOGANI 17th December,2011

  16. Exceptions of Related Party CA RAJEEV SOGANI 17th December,2011 • Following relationships will not be deemed as related party- • When two companies have a director in common but that director is not able to influence the mutual dealings entered into between the companies. • Here, X and Y Ltd. are related parties. Here, X and Y Ltd. are not related • parties. Y Ltd X Ltd Y Ltd X Ltd Ram (Non-Executive) Ram (Executive)

  17. Exceptions of Related Party CA RAJEEV SOGANI 17th December,2011 • Providers of finance. • Trade Union • A single customer or supplier or distributor or general agent with whom enterprise’s transactions are in significant volume. • Government Department • Any other party not covered in para 3(a) to 3(e)

  18. Exceptions to related party disclosures- Where such disclosures would conflict with the reporting enterprise’s duties of confidentiality as required by statute or regular or similar competent authority. For example- Banks are obliged by law to maintain confidentiality in respect of their customers. Intra-group transactions in consolidated financial statements as CFS present information about the holding and its subsidiaries as single reporting enterprise. Government Company's transactions with other Government Company’s. Related parties to each other Non Government Related Parties Exempt Not Exempt CA RAJEEV SOGANI 17th December,2011 SAIL BHEL A Ltd B Ltd C Ltd D Ltd

  19. DISCLOSURE REQUIREMENTS TRANSACTIONS NO TRANSACIONS • Name of related party. • Nature of relationship. • Nature of transactions. • Volume of transactions. • Any other element of the transactions, which is essential for understanding the financial statements. • The amount or appropriate proportions of outstanding items at the balance sheet date and provision for doubtful debts due from such parties. • Amounts written off or written back in the period in respect of dues from or to related parties. CONTROL NO CONTROL • Name of related party. • Nature of relationship. No disclosure is required. CA RAJEEV SOGANI 17th December,2011

  20. ASI-13 Items of similar nature may be disclosed in aggregate by type of related party, except when separate disclosure is necessary for an understanding of the effect of related party transactions. However, this is not done in such a way so as to obscure the importance of significant transactions. Hence, purchases or sales of goods are not aggregated with purchases or sales of fixed assets. Nor a material related party transaction with an individual party is clubbed in an aggregated disclosure. The issue is as to how the test of materiality should be applied for this purpose and what the meaning of type of related party is for this purpose. CA RAJEEV SOGANI 17th December,2011

  21. Interpretations The type of related party for the purpose of aggregation of items of a similar nature should be construed to mean the related party relationships given in para 3 of AS-18. Materiality primarily depends on the nature and the size of the item. As regards size, for the purpose of applying the test of materiality, ordinarily a related party transaction, the amount of which is in excess of 10% of the total related transactions of the same type (such as purchase of goods) is considered material subject to facts and circumstances of the case. CA RAJEEV SOGANI 17th December,2011

  22. Related Party Disclosures (ASI – 13) CA RAJEEV SOGANI 17th December,2011 Related Parties and their Relationship * 1) Holding Company Tata Sons limited 2) Subsidiaries 3)Fellow Subsidiaries Tata Capital Limited Tata AIG General Insurance Company Limited etc. 4) Associate National Power Exchange Limited 5) Key Management Personnel Mr. N. Chandrasekaran Mr. S. Mahalingam Mr. PhirozVandrevala *Reference- Tata Consultancy Services Limited (Annual Report 2010-2011)

  23. B) Transactions with Related Parties (ASI - 13) CA RAJEEV SOGANI 17th December,2011 Amount in `

  24. C) Balances Outstanding with Related Parties CA RAJEEV SOGANI 17th December,2011 Amount in `

  25. ASI-21 Issues A Non-Executive Director on the board-Whether related party A Non-Executive Director is covered by AS-18, in case, if he participates in the financial and/or operating policy decisions of an enterprise. Interpretations A Non-Executive Director should not be considered as a key management person under AS-18. The requirements of AS-18 should not be applied in respect of a Non-Executive Director, even if he participates in the financial and/or operating policy decision of the enterprise, unless he falls in any of the categories in para 3 of AS-18. CA RAJEEV SOGANI 17th December,2011

  26. ASI-23 Issues Remuneration paid to key management personnel – Whether a related party transaction Remuneration paid to non-executive directors on the Board of Directors - Whether a related party transaction. Interpretations Remuneration paid to key management personnel should be considered as a related party transaction requiring disclosures under AS-18. Non-Executive Directors on the Board of Directors are not related parties, remuneration paid to them should not be considered as a related party transaction. CA RAJEEV SOGANI 17th December,2011

  27. Capturing Related Parties as per AS-18 vis-à-vis 301 Register CA RAJEEV SOGANI 17th December,2011

  28. CA RAJEEV SOGANI 17th December,2011

  29. CA RAJEEV SOGANI 17th December,2011

  30. Determination of ALP not required in AS-18 • As per CARO 2003, para 4, clause v, requires the auditor to state in his audit report whether • The particulars of contracts or arrangements referred to u/s 301 have been entered in the register required to be maintained under that section or not? • The transactions made in pursuance of these contracts or arrangements have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time. • (This information is required only in case of transactions exceeding the value of five lakh rupees in respect of any party and in any one financial year). CA RAJEEV SOGANI 17th December,2011

  31. CA RAJEEV SOGANI 17th December,2011 THANK YOU

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